Understanding its effects, why it’s necessary, and how it’s implemented.
When considering policy, we may often take foundational positions for granted. Welfare no doubt falls under this category, everyone left of center or center most likely agrees that welfare is a net asset, but do we stop and consider why?
It’s important to flesh out foundational views, whether they be economic, philosophical, or sociological.
What Is Welfare?
Welfare, broadly defined, is a group or a collection of policies aimed to reallocate resources to those who do not have enough, or any capital or means to create capital.
Welfare manifests itself into various policies such as food stamps, affordable housing, Medicare, Medicaid, EITC (earned income tax credit), WIC (Women, Infants, Children) and many more.
The government allocates and pays for each of these programs. Many of these programs are means tested and rely on an individual’s or a family’s income to determine what they are eligible for.
Welfare aims to solve a problem: poverty
What causes poverty? Who does it affect?
The obvious and straightforward answer to what causes poverty is a lack of resources, but that doesn’t really tell us much about how to fix it.
Non Workers are hit the hardest by poverty, the poverty rate of people who do not work is 300 percent higher than those who do work, “put another way, non workers make up 3/4ths of all poor people”
What do we mean when we say non-workers? Does that mean the number of people who are unemployed? Yes, that includes them, but it’s much more than just that.
This graph is from the people’s policy project, they got their data from the 2017 census bureau
Virtually half of the entire population does not work, who are the 49 percent? Why aren’t they working?
This graph shows us the demographic of nonworkers, we can see that even if we had full employment, those who are unemployed only make up 1.1% of all non-workers
So we can deduce that since poverty affects those who are non-workers the most, and since only 1 percent of non-workers could potentially work, we need something more than just a bunch of jobs since the remaining 48% cannot or should not work
Further illustrating this, those with the highest levels of poverty, Elderly, disabled, children, etc, simply cannot or should not be made to work.
What can we do about this problem?
We have a few options with providing for those who do not have the means to do so themselves
1. Rely on privately funded charity
2. Push for children, students, the elderly, etc into the workforce
3. Set up social safety nets and welfare for those who cannot work
We used to rely more on private charity, however, once the great depression hit, it was shown that we could not rely entirely on markets to solve social problems and despite this, welfare has existed in the United States even before the Great Depression.
Additionally, we can see that donations of private charity falls with GDP, like in 2008, private charity donations fell, which is the opposite of what was needed from a charity or welfare system. The only reason why this fall wasn’t devastating was because of government policies that automatically picked up the slack of private charities, such as unemployment, food stamps, etc.
The second solution is obviously not a viable one, the elderly and disabled may not be able to work at all, even if pushed to, while the retired are an outlier here, many of the demographics here not only benefit from not working but rely on it.
Finally, we are left with a state solution, once we see and accept the premises of
1. Poverty affects nonworkers highly disproportionately
2. 50 percent of the population are nonworkers
3. Of those 50 percent, the vast majority should not be working
4. Private charity is not sufficient
Conc. Government redistributive policies are the answer. They don’t force nonworkers to work, they reduce poverty, they are more stable, reactive, and effective than private charity.
Case Studies of Welfare
So now that we have a good idea for why, foundationally speaking, welfare is a sufficient answer to the problems posed, what are some of the case studies of welfare in the United States and the Western World?
In a 2017 study called The Scandinavian Fantasy By James Heckman, economic mobility (a measure of the opportunity an individual has to make more money than what they started with) is virtually the same between the United States and Denmark BEFORE taking welfare policies into account, after, Denmark has a significantly higher income mobility than the United States.
Social Security With the Elderly
According to The Center On Budget and Policy Priorities, Social Security has helped massively with the elderly, without social security benefits, the poverty rate for the elderly would approach 38 percent of them under the poverty line, however, with social security now, only 9.7 percent do.
Social Security With Children
According to The Center On Budget and Policy Priorities, Social Security has lifted 1.2 million children out of poverty.
Social Security With All Demographics
Graph from The Center On Budget and Policy Priorities, Social Security massively helps lift millions of multiple demographics out of poverty.
Earned Income Tax Credit
According to The Tax Policy Center, The American Rescue Plan, which includes an expansion on the EITC and the introduction of the CTC (child tax credit) in conjunction with other welfare programs, according to the Urban Institute, there have been a number of projections
– Child Poverty is to be cut in half
– The number of people in poverty will be reduced by 16 million
– Poverty to fall by 42 percent for black, non-Hispanic people, 39 percent for Hispanic people, 34 percent for white people, reducing poverty disparities
Supplemental Security Income
According to The Center on Policy and Budget Resources the SSI plays an instrumental role in keeping people from falling into extreme poverty
The poverty rate of SSI recipients would be 65 percent before taking the cash transfer into account, after which, it’s reduced to 43 percent
The Effects of Reagan Slashing Welfare
In 1984, three years after Reagan slashed welfare programs and increased the baseline to receive welfare programs, according to a study of 207 Georgian households, many families lost their welfare benefits and Medicaid eligibility
Tom Joe, a welfare official in the Nixon administration, stated that many of the families in this study were already impoverished before these cuts, and were only pushed deeper into poverty.
The proportion of these 207 families in poverty rose from 70 percent to 79 percent
Many of these families went without Medicare, which resulted in them building up debt in conjunction with already being pushed deeper into poverty
Welfare Increases Entrepreneurship
According to a study done in Brown University that looked at an increase in the State Child Health Insurance Program (SCHIP) and whether or not it affects business ownership.
The study found various stats about this question but also about the policy in general
– 29 percent reduction in uninsured children
– 23 percent increase in self employment
Increased incorporated business ownership by 31 percent
– Increased the share of household self employment by 16 percent
– 12 percent increase in firm birth rates
Why does this happen? This results in a decrease of risk for many households as a result of various social safety nets which allows households and individuals to be more economically opportunistic and take risks which result in the creation of firms and businesses
Common Contrary Positions
Now that we’ve looked at some case studies of welfare succeeding, what are some common arguments against welfare?
“The poverty rate hasn’t budged.”
According to the official poverty rate, the percentage of people in poverty has not changed dramatically.
However, the problem with this is that the official poverty rate does not take into account many welfare programs such as SNAP, Public housing, Medicaid, and other non cash programs.
So yes, If we look at the official poverty rate, one which does not take into account the effects of welfare, it sure does look like welfare doesn’t do much.
In fact, this way of calculating poverty was so flawed, that in 2011, the US Census started publishing the newer version of calculating, the supplemental poverty measure.
With this, we see a much more dramatic decrease in poverty, this graph shows the measure of poverty before taxes and transfers (green) and after all welfare (blue)
As we can see demonstrated on the graph, the poverty rate is significantly higher before taking into account taxes & transfer
“People don’t want to work”
The MIT Economics department did a study where they looked at 7 randomized trials of 7 different developing countries to see the effects of welfare on the labor supply, they found no evidence that welfare reduced incentives to work.
According to the National Bureau of Economic Research, the EITC actually encourages work
Just follow this line of reasoning, if 49 percent of the population are nonworkers, and the vast majority of them cannot work, and the vast majority of welfare recipients are these individuals, how does that prevent them from working if they are not working in the first place?
“People Feel Entitled to Welfare”
People may just intuitively believe that most welfare recipients are just people who lay around and receive checks in the bank, however, according to The Center of Budget and Policy Priorities, over 90 percent of all welfare spending goes toward the elderly, disabled, or working households.
So the vast majority of entitlement benefits go towards those who are working, cannot work, or should not be made to work
“Big Government Leads to Corruption”
People may say that an increase in social spending leads to corruption, however this isn’t particularly well borne out in data
According to Transparency.org’s official ranking on the corruption Index the countries who rank the highest with the least corruption are: New Zealand, Denmark, Finland, Switzerland, and Singapore
All of these countries spend large amounts of social spending as a percentage of their GDP
“Increases Single Motherhood”
A study done by National Bureau of Economic Research shows that there is only a correlation between single motherhood and welfare recipients and not a causal link
“But Government Spending Bad, Fiscal Responsibility”
This now becomes an austerity debate, austerity and worrying about the national debt is a bit silly
It’s intuitive, if you owe someone money that’s bad, if you can’t pay it off that’s bad
But it’s very different for a state, especially when it lends money to itself, when the United States is lent money by the US federal reserve, they end up with very patient lenders (themselves)
Budget cuts reduce spending, a key aspect in building GDP, which is very important especially during recessions such as 2008 and 2020. Since consumption spending is down from individual consumption and firms, the government often has to step in with increases in spending to keep the economy going
This, as well as increasing in spending just as a result of having to provide welfare to more people, is why austerity does the opposite of what we need a state to do, especially now
An article by Michael Burtt from E-International Relations, he agrees with many other prominent and regarded economists such as Krugman and Blyth that cuts indeed do not lead to growth and that it is a dangerous concept
“Private Charities Are More Efficient”
This is simply not true, private charities have shown to have an extremely small to no effect on the poverty levels of a nation.
According to the peoples policy project, they show two data sets with graphs on public social spending (such as welfare) and private social spending (such as employer based health care or charity)
They found a negative correlation between increases in social spending and poverty, so an increase in public social spending correlates with a decrease in poverty levels, and private social spending has virtually no effect on poverty levels with an R squared coefficient of 0, meaning no correlation between private social spending and poverty
Additionally, they found that public social spending results in a decrease in the gini index, which is a measure of inequality in a country.
Public social spending has a negative relationship with the gini index which means that as public social spending increases, this strongly correlates with a decrease in inequality.
While private social spending actually has a slight correlation with an increase in the gini index
Through looking at welfare at a foundational level and understanding why, from my point of view, it’s necessary, as well as looking at various case studies and addressing some counter arguments some may provide, I believe we can have a more holistic view of welfare, rather than just supporting it just because people may just ideologically believe in it.
Disagree with me? Feel free to reach out 🙂